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Deleting the Zeros II (4/18/14)

BAGHDAD — A senior Iraqi Central Bank adviser says the government has adopted a two-pronged plan to restructure the national currency in order to facilitate large transactions and make government accounts more efficient, RFE/RL’s Radio Free Iraq reports.

Mudhhir Muhammad Salih, a member of the bank’s advisory panel, told RFE/RL on June 23 that in the short term, larger banknote denominations of the dinar would be issued to simplify major transactions.

He said that because so many Iraqis still dealt mainly in cash, it was cumbersome to carry bags full of money to pay for expensive items like cars. The inconvenience leads people making such purchases — as well as many entrepreneurs — to use dollars for those kinds of transactions instead of dinars, something the government wants to end.

He added that large denominations equivalent to around $100 would be issued to simplify major purchases, and new coins and lower denominations would be introduced for smaller transactions.

In the longer term, Saleh said a redenomination was needed wherein three zeros will be dropped so that the 25,000-dinar banknote — currently the largest denomination — becomes a 25-dinar note.

The other day I was watching a certain guru attempting to answer an email about deleting the zeros. Essentially the question was “what is meant by deleting the zeros?” The guru proceeded to babble on for more than ten minutes about economic growth, the wealth of the Iraqis being restored, the money supply figures aren’t accurate … etc. As far as I could tell he never really answered the question but he clearly suggested that it means revaluation rather than a lop. I felt that it was a good question and it deserved a good answer.

I asked this question myself a few years ago. It drove me to study the subjects of redenomination and revaluation. In my studies I came across numerous news articles about other currencies that lost value after periods of hyperinflation, and were now being replaced with a new currency. I noticed a pattern. They all seemed to include references to removing zeros from the nation’s currency. Sometimes they used the word “cut”. Other times they said “chop”. Some of the articles used “lop”, “slice”, “lift”, or “drop”. No matter what word was used, they were all clearly describing the same process. I wrote about this a while back in “Deleting the Zeros“.

When a country removes zeros from its currency it is a process that includes several components. First they have to announce it. A currency reform of this nature must be explained to people in order to proceed smoothly with no misunderstandings or complications, otherwise people might get the idea that the government is stealing from them. That is especially true in a country like Iraq where they had a ruthless dictator for decades who did exactly that. For the past few years the central bank of Iraq has been educating Iraqis about the coming monetary change. They’ve been telling them that the dinar that they’re using now will be replaced by a new currency at a ratio of 1000 old for 1 new dinar. This will be accompanied by a new exchange rate where the decimal will move three spaces to the left (from 1166:1 to 1.16:1) and the new value will see the decimal move three spaces to the right (from $.00086 to $.86), thereby removing three zeros. The new notes will have three less zeros. The 25,000 dinar note worth about $21.50 will be replaced by a 25 dinar note worth about $21.50. The 10,000 dinar note worth about $8.60 becomes a 10 dinar note worth about $8.60. The 5,000 dinar note worth about $4.30 would become a 5 dinar note worth the same …… etc.

After the announcement is made and the education process has begun, the new currency is designed and printed. There have been numerous articles about the designs being approved in Iraq but to my knowledge the printing process has never been approved because of the concerns among some in parliament that Iraq needs more stability before they can carry out this project. There have also been articles such as the one I recently wrote about stating that the current denominations are being printed with new paper, designs, and sercurity features. These would replace the worn out bills presently in use. If they go to the trouble and expense of printing new notes in the current dinar series one would assume that printing up notes to replace the IQD would still be a ways off.

Once the new bills are approved and printed they would be introduced into circulation. For a certain time frame (most articles about the dinar state two years) both currencies would be valid for in country purchases. In Iraq’s case an item that cost 86 cents could be purchased with either a 1,000 old dinar note or a new 1 dinar note. When the time frame expires only the new currency would be considered legal tender. Some articles have referred to a ten year period where the old currency will be redeemable at banks, but to my knowledge none have stated that it could be used for purchases beyond 2 years.

When the process is complete the people have a new currency without the all the zeros that were added because of hyperinflation. Transactions are simpler. Accounting is simpler. And the people feel better about using a currency that has greater value. But there is no net change in the purchasing power. If a person had 10 million of the old currency worth $10,000 they would now have 10 thousand of the new currency worth $10,000. No increase or decrease.

This process has been carried out dozens of times over the past 50 years in large countries like Russia and Brazil and small countries like Iceland and Turkmenistan. It’s been done in countries with great natural resources and countries without great natural resources. It’s occurred in countries with growing economies and countries where the economy wasn’t growing so well. The purpose is simplification of the monetary system, not to increase or decrease the wealth of the citizens.

I’ve discussed this process with a friend of mine who lives in a country where a redenomination occurred. I asked him if there was any change to his net worth when it happened and he said there wasn’t. “As long as you exchange for the new currency in time” he told me.

Shabibi in Washington D. C. – April 2011

Now that we’ve discussed what “deleting the zeros” means, let’s talk about what it doesn’t mean. It doesn’t mean removing three zeros from the value so that they can revalue 100,000% from $.00086 to $.86 and turn a $1,000 investment into $1 million. Revaluations don’t work that way. The largest revaluation in history was only 35% (China’s renminbi) and it took over eight years to move that much. It doesn’t mean removing the three zero notes from circulation, either. As I mentioned earlier they’re apparently planning on printing more three zero notes which they wouldn’t be doing if they were interested in removing them from circulation. The gurus insist that in Arabic the CBI is saying that they will remove the 000 notes from circulation, but it loses that meaning when translated into English. But the fact is Shabibi spoke about this in English when he visited Washington D.C. in 2011 and he clearly stated that deleting the zeros means redenomination. He said nothing about removing the 000 notes. I wrote about this in Shabibi Videos.

The “Delete the Zeros” project has been totally misrepresented by gurus. They want to convince dinar speculators that they will somehow benefit from this process. That’s simply not true. It’s a neutral event, and in fact there’s a better than even chance that holding IQD when they delete the zeros will end up costing you. That’s why this blog and others have been trying to warn people about the risk incurred in dinar speculation. The potential for profit is minimal and the potential for loss is enormous.

I will conclude with a quote from the September 2012 indictment of Brad Huebner and Rudolph Coenen for dinar fraud.

“A “redenomination” of the dinar refers to an actual proposal by the Central Bank of Iraq, announced as recently as June 21, 2011, to re-print the currency to remove three zeroes from the physical dinar banknotes as a matter of convenience. A redenomination of the Iraqi currency would not lead to a revaluation by the same amount, and may have no effect on the currency’s value. Under a redenomination, a new currency replaces an old currency, but the value remains the same.”